Bangkok Life Assurance

Bualuang Securities August 5, 2014 9:58 am

Favorable outlook

Investment thesis

Given solid 1Q14 expansion of 200% YoY for FYPs (driven by single-premium endowment products), we believe BLA can beat its FY14 FYP growth target of 51%. We have, thus, revised up our FY14 FYP growth forecast from 50% to 75%. But we have also raised our life policy provisioning assumption from 68% to 68.5% of total premiums, as we now expect greater single-premium sales. Our FY14 profit forecast of Bt5.4bn stands unchanged, but we have raised our projections by 5% to Bt6.3bn for FY15 and by 3% to Bt6.9bn for FY16. Our YE14 target price increases 12% to Bt99.5, pegged to YE14 embedded value of Bt36.91/share and VNB of Bt62.60. BUY!

Total premium growth of 66% YoY now expected for FY14

We raised our FY14 total premium growth forecast from 60% to 66% after BLA posted impressive 1Q14 expansion of 200% YoY for FYPs and 104percent for total premiums. For the remaining nine months of the year, the firm has shifted its saving/endowment product sales focus from short-term policies (Gain 1st 116 and Gain 1st 245) to long-term policies (Bualuang Huang Luk Lan and Bualuang Huang Krobkrua), whole life and credit life products with premium payment periods ranging 7-15 years. These products carry fat margins, but are relatively difficult to sell.

Provisioning to normalize in 2Q14

The 1Q14 focus was on short-term low-margin endowment products, for which BLA set heavy provisions for its life policy reserve equal to 84% of total premium revenue. Management guides for a ratio range of 65-69percent for the year as a whole. The heavy 1Q14 provisioning prompted us to raise our life policy provisioning assumption from 68% of total premiums to 68.5%. Yet, the focus shift to new fat-margin products suggests that the ratio will fall sharply, 2Q-4Q14 from 1Q14 and BLA's profitability will increase. We expect a 2Q14 ratio of 67%.

FY14 ROI target > 5%

The firm is confident that it will achieve FY14 and FY15 ROI of at least 5% after posting 4.6% in 1Q14 (the SET declined). Higher bond yields present an opportunity for BLA to accumulate more medium- to long-term bonds. It recently invested Bt13bn (10% of its investment portfolio) in foreign currency-denominated bonds that yield over 6%.

Anticipate 2Q14 earnings growth of 37% QoQ

We expect BLA to post a 2Q13 profit of Bt1.5bn, up by 3% YoY and 37% QoQ. The assumed solid QoQ earnings growth is largely due to lighter provisions on the life policy reserve, as the firm switched to high-margin products with longer maturities. We expect provisions for its life policy reserve equal to 67% of total premium revenue, down from 84% in 1Q14. 2Q14 total premium (plus single-premium) revenue is estimated at Bt9.6bn, up 6% YoY (but down 64% QoQ).